NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Liquidity and Risk Management: Coordinating Investment and Compensation Policies

Patrick Bolton, Neng Wang, Jinqiang Yang

NBER Working Paper No. 20979
Issued in February 2015, Revised in September 2017
NBER Program(s):   CF

We study the corporate finance implications of risky inalienable human capital for a risk-averse entrepreneur. We show how liquidity and risk management policies coordinate investment and executive compensation policies to efficiently retain managerial talent and honor corporate liabilities. The firm optimally balances the goal of attaining mean-variance efficiency for the entrepreneur’s net worth and that of preserving financial slack. The former is the main consideration when the firm is flush with liquidity and the latter is the only consideration when the firm has depleted its financial slack. We show that relative to the first-best, the entrepreneur’s net worth is over-exposed to idiosyncratic risk and under-exposed to systematic risk. These distortions are greater the more financially constrained the firm is.

You may purchase this paper on-line in .pdf format from SSRN.com ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.

E-mail:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20979

Users who downloaded this paper also downloaded* these:
Bolton, Wang, and Yang w20610 Investment Under Uncertainty and the Value of Real and Financial Flexibility
Gromb and Vayanos w20968 The Dynamics of Financially Constrained Arbitrage
Bai, Hou, Kung, and Zhang w21016 The CAPM Strikes Back? An Investment Model with Disasters
Gârleanu and Pedersen w12887 Liquidity and Risk Management
Giglio, Kelly, and Pruitt w20963 Systemic Risk and the Macroeconomy: An Empirical Evaluation
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us